FRANKFURT/LONDON (Reuters) - Demand for new cars in recession-bound Europe fell to a 17-year low in 2012, leaving mass market manufacturers little hope for this year as they try to cut costly excess factory capacity and aggressive discounting dents their margins.

Registrations data released on Wednesday also showed the biggest annual drop since a 16.9 percent downturn in 1993, highlighting the crisis for automakers in Europe. Consumers are fretting over austerity measures, job security and rising living costs, and those who want to buy new cars are struggling to secure credit.

Even Germany's mighty Volkswagen (VOWG_p.DE) suffered a drop in sales, according to the figures from the European automotive industry association ACEA. However, South Korean brands Hyundai (005380.KS) and Kia (000270.KS), which are making an aggressive push in Europe, proved it is possible to expand sales even during a grim downturn.

Peter Fuss, senior advisory partner at Ernst & Young's Global Automotive Center, said an industry practice of registering new cars before offering them as used vehicles at a discount was flattering even the dire new sales figures.

"The actual decline is much worse than the statistics would have us believe as sales figures for the year were artificially inflated as a result of self-registrations by dealers and automakers, especially in the region's biggest market, Germany," said Fuss.

New car registrations fell 8.2 percent to 12.05 million vehicles in 2012, the lowest level since 1995, ACEA reported. Losses in all major euro zone economies, combined with two fewer working days on average, sent European Union registrations tumbling 16.3 percent last month to 799,407 vehicles, it added. This marked the worst plunge in 26 straight months - since October 2010.

The industry tried to satisfy more robust demand for second-hand cars through the self-registrations.

Nearly 904,500 vehicles, or 29.3 percent of the new car market, were registered last year either to car manufacturers themselves or their dealers in Germany, figures from Frankfurt-based Dataforce and the German Federation for Motor Trades and Repairs showed.

"Further, to prevent a freefall in sales, automakers and dealers offered record discounts, which are likely to put a lot of pressure on their margins," Fuss added.

Even the German economy is suffering from the euro zone recession. In the final quarter of last year, it shrank more than at any point in nearly three years, data showed on Tuesday.

Among the worst hit last month were mass-market stalwarts including U.S. carmakers Ford (F.N) and General Motors (GM.N), where group sales each fell roughly 27 percent. GMT's Chevrolet brand posted an even weaker month than its ailing sister Opel.

Even Volkswagen, which was performing better than its peers earlier in the year, saw sales of its core VW brand fall 22 percent. The December plunge at its luxury brand Audi nearly matched that.

However, Hyundai and Kia remained a rare bright spot as they push out models with styling that has proved popular with buyers, gaining 10.5 percent and 6.8 percent respectively. The brands have been gaining ground, helped by a European Union Free Trade Agreement with South Korea, as they build a reputation for affordable small cars with long warranties.

DARKEST BEFORE THE DAWN?

Britain was also a brighter spot where the 2012 market grew 5.3 percent to a four-year high, helped by self-registrations, aggressive discounting and a wide range of financing deals allowing drivers to pay a fixed monthly cost, eliminating the risk of buying a car outright.

"We haven't seen the levels of discounting we've seen in 2012 for quite some time," said John Leech, KPMG's UK head of automotive.

Paul Everitt, chief executive of UK auto industry body SMMT, said "pent-up demand" also helped British sales as habitual new car buyers who had stayed out of the market for the past few years began returning to the showrooms.

However, demand for new cars last year remained down about 15 percent from pre-recession, 2007 levels. The SMMT expects demand to be broadly stable in 2013 in a "challenging" market.

The European outlook is subdued for this year too. Market forecaster LMC Automotive recently estimated a 3.1 percent drop in western European sales to 11.4 million vehicles, an 11 percent drop from the 12.8 million sold in 2011.

Some experts hedged their bets, arguing that the darkest time might be just before the dawn.

"Maybe, just maybe the next move in car sales could be up. If unemployment doesn't worsen ... if access to credit doesn't deteriorate ... if consumers grow no more fearful ... then it's possible. A recovery in European demand could be the biggest upset of 2013," Bernstein analyst Max Warburton wrote in a research note.

(Reporting By Christiaan Hetzner; Editing by Louise Heavens and David Stamp)

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